Why bankers are disappointed with announcements on MSME loans

The loan guarantee scheme for micro, small and medium enterprises (MSMEs) will not be available to businesses which had repayments overdue by more than 30 days as on February 29, 2020

By Shritama Bose & Ankur Mishra

The credit guarantee scheme for micro, small and medium enterprises has left bankers unhappy as the guarantee is not being offered by the government, but from the credit guarantee trust fund for micro and small enterprises (CGTMSE).

The loan guarantee scheme for micro, small and medium enterprises (MSMEs) will not be available to businesses which had repayments overdue by more than 30 days as on February 29, 2020, according to the draft guidelines issued by the Small Industries Development Bank of India (Sidbi).

“We were expecting the guarantee on loans to come from the government of India, but it has come from CGTMSE instead of being a sovereign guarantee,” the head of a public-sector bank (PSB) told FE. “CGTMSE has its caveats..it does not give you the full money, which is lost,” he added. For stressed MSMEs and those whose loans have turned bad, a Rs 20,000-crore subordinated debt scheme has been envisaged.

The interest rate on additional emergency funding has been capped at 1% over a bank’s marginal cost of funds based lending rate (MCLR) and at 14% for non banking financial companies (NBFCs). Lenders believe the interest rates are justified as there will be some capital charges. “When government guarantees a loan, capital charges become zero, but in case of CGTMSE guarantee, there will be some capital charges,” a second banker told FE.

The draft guidelines state that the guarantee scheme will apply to all additional emergency credit lines sanctioned to MSMEs after March 1, 2020 till August 31, 2020. The amount of emergency working capital funding would be equivalent to 15% of the working capital for loans up to Rs 1 crore. For loans between Rs 1 crore to Rs 25 crore the emergency working capital funding would be equivalent to 10% of the working capital.

“In case the amount of emergency fund as per above threshold is not able to cover six months of salary outgo (including contractual worker) for people employed by MSME, the working capital fund has to be enhanced to the amount of 6 months of salary outgo,” the draft guidelines said, adding that lenders must obtain necessary proof to ascertain the salary outgo of the MSME.

“This is to ensure that MSMEs don’t lay off any employee due to the lack of funds.” In case a borrower has existing limits with more than one lender, the emergency funding limit can be availed with only one lender.